Q1 2018 Earnings Call W.W. Grainger, Inc. April 19, 2018 Safe - - PowerPoint PPT Presentation

Q1 2018 Earnings Call

W.W. Grainger, Inc.

April 19, 2018

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All statements in this communication, other than those relating to historical facts, are “forward-looking statements.” These forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. These forward-looking statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from expectations include, among others: higher product costs or other expenses; a major loss of customers; loss or disruption

• f source of supply; increased competitive pricing pressures; failure to develop or implement new technologies; the implementation, timing and

success of our strategic pricing initiatives; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses; changes in credit ratings; changes in effective tax rates and other factors which can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Additional information relating to certain non-GAAP financial measures referred to in this presentation, including adjusted operating earnings, adjusted segment operating earnings, adjusted net earnings and adjusted diluted earnings per share, is available in the appendix to this presentation and our most recent earnings release.

Safe Harbor Statement and Non-GAAP Financial Measures

DG Macpherson

Chairman and Chief Executive Officer

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($ in millions)

Q1 2018 Q1 2017 % vs. PY Sales $ 2,766 $ 2,541 9% GP 1,092 1,019 7% Op Expense 757 727 4% Op Earnings $ 335 $ 293 14% EPS $ 4.07 $ 2.93 39%

(% of sales)

Q1 2018 Q1 2017 bps vs. PY GP Margin 39.5% 40.1% (60) Op Expense 27.4% 28.6% (120) Op Margin 12.1% 11.5% 60

• Reported results included

restructuring items that had an $8 million charge to operating earnings and a $0.11 negative impact to EPS

• The remaining slides reference

adjusted results, which exclude items outlined on page 2 of the earnings release

Q1 2018 Reported Results – Total Company

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Q1 2018 Adjusted Results – Total Company

• Sales up 9% vs. prior year
• Volume up 8%, seasonal sales up 1%,
• ffset by 1% decline due to Techni-Tool

divestiture

• Price down 1%
• FX favorability of 2%
• Normalized GP rate declined 30 bps (adjusted

for revenue recognition change and national sales meeting timing, see appendix)

• GP rate better than expected driven by U.S.

volume mix, price/cost spread and Canada price increases

• OpEx rate declined 120 bps (adjusted for

revenue recognition change, see appendix)

Note: Sales days were the same in Q1 2018 and Q1 2017. Reference slide 26 for GAAP vs. non-GAAP reconciliation.

($ in millions)

Q1 2018 Q1 2017 % vs. PY Sales $ 2,766 $ 2,541 9% GP 1,091 1,019 7% Op Expense 749 732 2% Op Earnings $ 343 $ 287 19% EPS $ 4.18 $ 2.88 45%

(% of sales)

Q1 2018 Q1 2017 bps vs. PY GP Margin 39.5% 40.1% (60) Op Expense 27.1% 28.8% (170) Op Margin 12.4% 11.3% 110

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Q1 2018 Adjusted Results – Other Businesses

($ in millions)

Q1 2018 Q1 2017 % vs. PY Sales $ 588 $ 497 18% Op Earnings $ 38 $ 32 19%

(% of sales)

Q1 2018 Q1 2017 bps vs. PY Op Margin 6.4% 6.3% 10

• Sales up 18% vs. prior year
• Price and volume up 12%
• FX favorability of 6%
• Performance driven by 24% sales

growth for single channel businesses, which continue to be a profitable growth driver

• International portfolio improving

margins

Note: Single channel businesses include all Zoro businesses and MonotaRO in Japan. International portfolio includes Cromwell, Fabory, Mexico, other Latin America businesses and China. Reference slide 26 for GAAP vs. non-GAAP reconciliation.

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Q1 2018 Adjusted Results – Canada

(USD in millions)

Q1 2018 Q1 2017 % vs. PY Sales $ 182 $ 186

• 2%

Op Earnings $ -9 $ -16 41%

(% of sales)

Q1 2018 Q1 2017 bps vs. PY Op Margin

• 5.1%
• 8.4%

330

• Sales down 2% vs. prior year, down

6% in local currency

• Price up 7%
• Volume down 13%
• Local currency operating expenses

down 8% due to branch closures and cost reductions

• Operating margin better than

expected due primarily to a higher GP rate as a result of market-based price increases and cost management

Note: Reference slide 26 for GAAP vs. non-GAAP reconciliation.

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Q1 2018 Adjusted Results – United States

($ in millions)

Q1 2018 Q1 2017 % vs. PY Sales $ 2,108 $ 1,953 8% Op Earnings $ 352 $ 303 16%

(% of sales)

Q1 2018 Q1 2017 bps vs. PY Op Margin 16.7% 15.5% 120

• Sales up 8% vs. prior year
• Volume up 9%, intercompany sales up 1%,

seasonal sales up 1%, partially offset by 1% decline due to Techni-Tool divestiture

• Price down 2%
• Normalized GP rate declined 60 bps (adjusted

for revenue recognition change and national sales meeting timing, see appendix)

• Operating expenses were up 2% on 9% volume

growth (adjusted for revenue recognition change, see appendix)

• Operating margin better than expected as

expense leverage more than offset GP rate decline

Note: Reference slide 26 for GAAP vs. non-GAAP reconciliation.

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Customer Response to Pricing Reset Remains Strong

Note: U.S. Large revenue of $6.2 billion and U.S. Medium revenue of $0.9 billion as of 12/31/2017. Total product COGS dollars (excludes freight, rebates and other adjustments) used as a proxy for volume.

U.S. Medium: daily volume growth

• n $0.9 billion of revenue
• 10%
• 7%

3% 18% 26% 30%

• 10%

0% 10% 20% 30% Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18

• U.S. Medium volume growth of 30% in the quarter

exceeded expectations

• Increasing penetration with existing customers and

acquiring new customers

U.S. Large: daily volume growth

• n $6.2 billion of revenue

1% 3% 4% 5% 8% 7% 0% 5% 10% Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18

• U.S. Large volume growth of 7% in the quarter

exceeded expectations

• Continued increase in dollar volume each quarter

since Q4’16

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Raised 2018 Guidance Ranges

As of 1/24/2018

2018E Sales ($ billions) $10.7 - $11.2

% vs. prior year 3% to 7%

• Op. Earnings

$1.1 - $1.2

% vs. prior year

• 2% to 6%
• Op. Margin

10.5% - 11.1%

bps vs. prior year (60) to 0

EPS $12.95 - $14.15

% vs. prior year 13% to 24%

*Typo corrected at 8:00 a.m. 4/19/2018. Note: Guidance as of 4/19/2018. Reference slide 26 for GAAP vs. non-GAAP reconciliation. Results for 2017 have been restated due to adoption of Accounting Standards Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715). See supplement on IR website.

As of 4/19/2018

2018E $10.9 - $11.3*

5% to 8%

$1.2 - $1.3

6% to 14%

11.1% - 11.5%

10 to 50

$14.30 - $15.30

25% to 33%

• 2018 revenue now expected to grow 5% to 8%
• n better price deflation and improved FX
• Strong volume in the U.S. is offset by softer

volume in Canada

• Operating margin now expected to be 11.1%

to 11.5% on improved GP rate and expense productivity

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2018: Q1 Actuals and Full Year Guidance at the Midpoint

Actuals Q1 2018 Sales ($ billions) $2.8

% vs. prior year 9%

GP 39.5%

bps vs. prior year (60)

normalized (30)

OpEx 27.1%

bps vs. prior year (170)

• Op. Margin

12.4%

bps vs. prior year 110

EPS $4.18

% vs. prior year 45%

Midpoint FY 2018E $11.1

6.5%

38.3%

(110)

(60)

27.0%

(140)

11.3%

30

$14.80

29%

• Expect the strong performance in Q1 to continue

throughout the year

• Sales growth rate still expected to slow as we

face tougher comps in H2 and some favorability in Q1 does not repeat

• Q1 2018 normalized GP rate was down 30 bps

(adjusted for revenue recognition change and national sales meeting timing)

• Will continue to hold Canada expectations

consistent with January guidance

Note: Guidance as of 4/19/2018. Reference slide 26 for GAAP vs. non-GAAP reconciliation. Results for 2017 have been restated due to adoption of Accounting Standards Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715). See supplement on IR website.

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January to April 2018E EPS Detail

As of 1/24/2018

Q1 Actuals versus Expectations Q2-Q4 Estimated

As of 4/19/2018

EPS 2018E EPS 2018E $13.55 $13.55 Ongoing Favorability 0.20 0.60 0.80 One-off/ Non-Repeating 0.45 0.45 Timing 0.10 (0.10)

• $13.55

0.75 0.50 $14.80

Q1 EPS exceeded internal expectations by $0.75:

• $0.20 of U.S. volume and price favorability

per quarter will carry through the full year

• $0.45 was one-off in nature and is not

expected to repeat:

• Tax benefit from stock-based awards
• International business favorability
• Timing of contract negotiations in the U.S.
• Change in accounting estimate in the U.S.
• $0.10 was timing related and will reverse in

the year

Note: Guidance as of 4/19/2018. Reference slide 26 for GAAP vs. non-GAAP reconciliation.

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As of 1/24/2018

2018E

As of 4/19/2018

2018E Total Price

• 2.0%
• 1.5%

Price Reset

• 3.0%
• 3.0%

Price Increases/Mix +1.0% +1.5% COGS

• 0.5%
• 0.5%

Total

• 1.5%
• 1.0%

2018 U.S. Segment Price/Cost

• Pricing reset on track
• Price expected to improve on market-based

price increases and better mix

• Expectation of COGS deflation of -0.5% for

2018 remains consistent

Note: As of 4/19/18.

Closing Remarks

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Q&A

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Appendix

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2018 Guidance

Note: As of 4/19/2018. Reference slide 26 for GAAP vs. non-GAAP reconciliation.

LOW MID-PT HIGH Sales ($B) $10.9 $11.1 $11.3 EPS $14.30 $14.80 $15.30 Sales growth 5% 6.5% 8%

• Op. Earnings growth

6% 10% 14% EPS growth 25% 29% 33%

• Op. Margin

11.1% 11.3% 11.5%

• Op. Margin bps vs. PY

10 bps 30 bps 50 bps

• Mid-single digit revenue growth

expected on share gains and strong demand environment

• Gross profit rate expected to decline
• 110 bps at the midpoint (50 bps is

revenue recognition accounting change)

• Operating expense to sales expected to

improve 140 bps at the midpoint as productivity is partially offset by incremental digital investment

• Expected to result in operating margin

improvement of 30 bps at the midpoint

• vs. 2017 actuals

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Q1 2018: Revenue Recognition Change

Total Company Q1 2018

Q1 Actuals

• Excl. Rev. Rec. Change

($ billions)

Q1 2018 % vs. PY Q1 2018 % vs. PY Sales $2.8 9% $2.8 9% Gross Profit 1.1 7% 1.1 9% Expenses 0.7 2% 0.8 4%

• Op. Earnings

0.3 19% 0.3 19% % of Sales bps vs. PY % of Sales bps vs. PY GP 39.5% (60) 39.9% (10)* EXP 27.1% (170) 27.6% (120) OM 12.4% (110) 12.4% (110)

No impact to operating margin. Reclassification lowers operating expenses and increases cost of goods sold.

• New revenue recognition

accounting standard reclassifies certain service costs from

• perating expense to cost of

goods sold

• GP rate and operating expenses

as a percent of sales lower by 50

• bps. No impact to operating

margin

*Note: GP rate normalized for revenue recognition and national sales meeting timing was down ~30 bps.

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No impact to operating margin. Reclassification lowers operating expenses and increases cost of goods sold.

U.S. Segment Q1 2018

Q1 Actuals

• Excl. Rev. Rec. Change

($ billions)

Q1 2018 % vs. PY Q1 2018 % vs. PY Sales $2.1 8% $2.1 8% Gross Profit 0.9 5% 0.9 7% Expenses 0.5

• 1%

0.5 2%

• Op. Earnings

0.4 16% 0.4 16%

% of Sales

% of Sales bps vs. PY % of Sales bps vs. PY GP 40.3% (95) 40.9% (35)* EXP 23.6% (215) 24.2% (155) OM 16.7% 120 16.7% 120

Q1 2018 Actuals: Revenue Recognition Change – U.S.

• New revenue recognition

accounting standard requires a reclassification of certain service costs from operating expense to cost of goods sold

• Change lowers GP rate and
• perating expenses as a percent of

sales by 60 bps. No impact to

• perating margin

*Note: GP rate normalized for revenue recognition and national sales meeting timing was down ~60 bps.

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Note: As of 4/19/18. 1. Other includes impact of sales day differences, weather/holiday timing, divestitures, FX and intercompany.

Company 2018E U.S. Segment 2018E 1/24/2018 4/19/2018 1/24/2018 4/19/2018 Volume 7.0% 7.0% 6.0% 7.0% Price

• 1.5%
• 1.0%
• 2.0%
• 1.5%

Organic (Daily) 5.5% 6.0% 4.0% 5.5% Other1

• 0.5%

+0.5%

• 0.5%
• 0.5%

Total 5.0% 6.5% 3.5% 5.0%

2018 Guidance: Sales Bridge

• Higher volume expectations on

strong U.S. market (now 3-4% for year) offset by Canada volume

• Price expected to improve from
• 1.5% to -1.0% due to less price

deflation in the U.S. and Canada price increases

• Other expected to improve due to

improved FX

• U.S. price expected to improve from
• 2.0% to -1.5% due to less price

deflation in the U.S. (market-based price increases and mix)

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Restructuring costs and savings averaging a 2-year payback

Restructuring Costs and Benefits

Note: As of 4/19/2018.

Cost Savings

($Millions)

'17 '18E '17 '18E '19E U.S.

18 0 - 10 15 45 - 65 45 - 55

Canada

39 40 - 50 13 25 - 35 25 - 35

Colombia

37 2 0 - 5

Other Business Units

19 0 - 5 3 10 - 15 Total 112 40 - 65 33 80 - 120 70 - 90

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Quarterly Daily Sales

Q1 2018 Daily Sales vs. Q1 2017 Drivers Company United States Canada Other Businesses Volume 8% 9%

• 13%

12% Price

• 1%
• 2%

7% Foreign exchange 2% n/a 4% 6% Seasonal Sales 1% 1% Intercompany n/a 1% Divestiture

• 1%
• 1%

Change vs. Prior 9% 8%

• 2%

18% % of Company Revenue 100% 73% 6% 21% Q1 2018 Daily Sales by Month Month Company January 9% February 9% March 9% Q1 9%

Note: There were 64 selling days in Q1 2018 and 64 selling days in Q1 2017.

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• Reseller: up Low Double Digits
• Retail: up Low Double Digits
• Heavy Manufacturing: up High Single Digits
• Government: up High Single Digits
• Contractor: up High Single Digits
• Natural Resources: up Mid-Single Digits
• Commercial: up Mid-Single Digits
• Light Manufacturing: up Low Single Digits

Q1 2018 U.S. Sales By Customer End Market

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Q1 2018 Branch Summary

First Quarter 2018 Branch Summary Branches Branches Distribution Centers 12/31/2017 Opened Closed 3/31/2018 3/31/2018 United States 284 2 1 285 16 Canada 91 17 74 7 Other Businesses Fabory 44 44 2 Mexico 19 2 17 2 Cromwell 55 2 53 1 China 1 Puerto Rico 5 5 Dominican Republic 1 1 Japan 3 Peru 1 1 Total Other Businesses 125 4 121 9 Total 500 2 22 480 32

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Other Notes

Month 2018 2017 1Q 64 64 2Q 64 64 3Q 63 63 4Q 64 63 Full Year 255 254

Selling Days – 2017 and 2018 2018 Event Dates

Event Date Q1 Earnings April 19, 2018 Q2 Earnings July 18, 2018 Q3 Earnings October 16, 2018 Analyst Meeting November 7, 2018 Q4 Earnings January 24, 2019

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Q1 2017 and 2018 GAAP to Non-GAAP Reconciliations

(In thousands of dollars) Three Months Ended March 31, 2018 2017 % Operating earnings reported $ 334,830 $ 292,501 14 % Restructuring (United States) 3,101 3,066 Branch gains (United States) (7,528 ) (9,388 ) Restructuring (Canada) 10,920 1,087 Restructuring (Other Businesses) 1,175 — Restructuring (Unallocated expense) 370 — Subtotal 8,038 (5,235 ) Operating earnings adjusted $ 342,868 $ 287,266 19 %

Three Months Ended March 31, 2018 2017 % Segment operating earnings adjusted United States 352,077 303,320 Canada (9,237 ) (15,642 ) Other Businesses 37,597 31,507 Unallocated expense (37,569 ) (31,919 ) Segment operating earnings adjusted $ 342,868 $ 287,266 19 % Company operating margin adjusted 12.4 % 11.3 % ROIC* for Company 28.9 % 24.0 % ROIC* for United States 46.8 % 38.8 % ROIC* for Canada (7.3 )% (11.5 )%

*Adjusted ROIC is calculated as defined on page 7 of our earnings press release, excluding the items adjusting operating earnings as noted above. Three Months Ended March 31, 2018 2017 % Net earnings reported $ 231,535 $ 174,744 32 % Restructuring (United States) 2,365 1,919 Branch gains (United States) (5,741 ) (5,878 ) Restructuring (Canada) 8,330 803 Restructuring (Other Businesses) 950 — Restructuring (Unallocated expense) 282 — Subtotal 6,186 (3,156 ) Net earnings adjusted $ 237,721 $ 171,588 39 % Diluted earnings per share reported $ 4.07 $ 2.93 39 % Pretax adjustments: Restructuring (United Sates) 0.05 0.05 Branch gains (United States) (0.13 ) (0.16 ) Restructuring (Canada) 0.19 0.02 Restructuring (Other Businesses) 0.02 — Restructuring (Unallocated expense) 0.01 — Total pretax adjustments 0.14 (0.09 ) Tax effect (1) (0.03 ) 0.04 Total, net of tax 0.11 (0.05 ) Diluted earnings per share adjusted $ 4.18 $ 2.88 45 % (1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the company's ability to realize the associated tax benefits.

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Laura D. Brown Senior Vice President, Communications & Investor Relations Laura.Brown@grainger.com 847.535.0409 Irene Holman Senior Director, Investor Relations Irene.Holman@grainger.com 847.535.0809 Michael P. Ferreter Senior Manager, Investor Relations Michael.Ferreter@grainger.com 847.535.1439

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